Closing Purchase Loans with Credit Scores Below 600 - Say it Ain't So!
In this current credit tightening market, there are still some options out there for financing a home mortgage with a credit score below 620. In case you are not aware, 620 is the current magic number (cut off) for the majority of loan options available today.* But not all loans are created the same!
As an example, one of the options still available today for credit scores below 620 are the NJ first time home buyer mortgage programs. Last week we closed a purchase transaction where the buyer had a 597 FICO score. That is not a typo ... 5-9-7.
There are still some mortgage programs out there that can be approved through an automated system with lower credit scores. Even where an automated (computer generated) approval is unavailable, a buyer with a lower credit score can still be approved as a manually underwritten loan. This is where an underwriter crunches their own numbers, and digs into the file. You know, the way they did it before the computers and Internet took over. If the file is solid you may be approved.
What would be considered a solid borrower or a strong file? Here are some examples:
- Good debt ratios - your total monthly debts are in line with your gross income: Around 41%. This can not be overstated. Going far above this in many cases isn't good for a borrower.
- Good work history - longer work history is typically a safer borrower. A sound profession in this current economic environment would also work in your benefit.
- Reserve assets - Will you have money after you settle? The "more the merrier";. Even retirement accounts left untouched will make a borrower look stronger. In case of emergency, they would be able to pull these funds out.
You might think of it this way; Would you want to lend money to you? Are you a bit over extended? Is the underwriter going to look at this and say, "I'd be scared if I was in this position and buying a home?" Are you familiar with making a rent payment and have you been consistently on time? These questions will help you understand how an underwriter may think. As well as what you may want to think about.
"I know my credit scores aren't high enough!"
Even if your scores are a bit lower than where they should be, a little education and a little tweaking of your credit profile could give you the boost in a credit score to make things happen. Getting a credit score boost of 20-30 points typically isn't too difficult. And a higher increase may be obtainable as well, depending on your credit profile. Just make sure you are working with a lender that knows the credit scoring model inside-and-out before you take their advice!!
Where to go now ...
There is no doubt that the credit markets have tightened over the last few years. In some cases a little too much. But not all is lost. If you find yourself or someone you know in a tough situation, find a local expert to help you out. The reality is that not everyone will qualify, but there is no doubt that some more would qualify if they knew the options were even available - somewhere.
*Even when mortgage guidelines don't have specific credit score requirements, there may be something called "lender overlays". These are additional restrictions on top of the basic guidelines and can vary among lenders. For this reason at times one lender have more flexible guidelines than another one down the street.